Charles Hoskinson, one of ethereum's original architects, has become vocal about the dangers lurking in the initial coin offering boom. He told Bloomberg that the sector is experiencing an \"over-token
Charles Hoskinson, one of ethereum's original architects, has become vocal about the dangers lurking in the initial coin offering boom. He told Bloomberg that the sector is experiencing an "over-tokenization of things," a shorthand for a problem he sees as fundamental. Companies are issuing tokens to solve problems that existing blockchains handle fine, Hoskinson argued. When investors see the kinds of returns circulating in the market, they stop asking whether the tokens actually solve anything. "People are blinded by fast and easy money," Hoskinson said.
Tokens as a fundraising mechanism started gaining traction in 2016, after years of false starts. ICOs pulled in $26 million back in 2014 and just $14 million in 2015, but that changed when The DAO launched. The project raised over $150 million and issued more than one billion tokens, becoming the era's biggest ICO. That crown came with a cost. A $59 million vulnerability in the project's code gave hackers an opening, and Ethereum's developers performed a hard fork to recover the stolen funds. The DAO episode should have served as a warning.
The ICO market has exploded in recent months. In the first six months of 2017 alone, companies raised $1.3 billion through ICOs on more than 50 projects, according to research from Autonomous NEXT, a financial research firm. That pace crushes venture capital funding for blockchain and bitcoin startups. The momentum has not slowed. In the most recent month, another $600 million flowed into new offerings.
The raw returns explain the fervor. Stratis gave early backers 80,000% gains. Ethereum produced 74,000% returns. IOTA delivered 68,000%. Those kinds of numbers ensure that more ICOs will keep launching through the rest of 2017.
But the velocity of this movement troubles many observers. The trajectory is hard to ignore: $26 million in 2014, $14 million in 2015, then $1.3 billion in just six months of 2017. That kind of curve looks less like organic growth and more like a bubble building pressure. On Twitter, a user named USAF BitNovosti.com drew a distinction between cryptocurrency itself and the ICO craze surrounding it. "This bubble is much more about ICOs than cryptocurrencies," the account said. "And ICOs can and many will go broke."
The risks started showing up immediately. On July 17, someone hacked the CoinDash ICO. The attacker changed the smart contract address for the project, routing new funds to a fraudulent wallet. The initial take was $7 million. Other investors, unaware of the hack, kept depositing into the fake address. That pushed the total to $10 million, with 43,500 ether from confused investors going to the attacker.
Two days later, another hack surfaced. Parity, which makes ethereum wallet software, announced it had been breached on July 19. Attackers stole more than 150,000 ether, a haul worth $35 million at the time. Gavin Wood, Parity's founder and chief executive, said that three accounts had been compromised. He advised affected users to move funds from the vulnerable multi-sig wallets to safer addresses. "There is an effort by the foundation to secure funds in other wallets to prevent further compromises," Wood said in a blog post. "They will make an announcement in their own time." On July 20, ethereum's price fell 10 percent to $211 after the announcement.
These hacks expose a deeper vulnerability: ICOs operate without real regulatory guardrails. That void creates confusion and makes it simple for criminals to steal. But regulation itself shapes the bigger picture here.
The United States has jurisdictional chaos when it comes to cryptocurrency. The SEC, the OCC, the CFTC, FinCEN, and the IRS all claim authority over some aspect of cryptocurrency and token issuance. This patchwork of overlapping rules has made it difficult to start a cryptocurrency company or issue tokens without hitting legal snags. Hoskinson predicts that the SEC will at some point declare digital coins securities, moving them under much stricter sales and disclosure rules.
Despite all this, Hoskinson thinks ICOs will persist past the current hype cycle. Once the enthusiasm fades and projects fail and regulators impose real rules, the mechanism itself won't disappear. Companies will find ways to use tokens to raise capital instead of pursuing traditional venture capital deals. The core will remain. "Regardless of regulation ICOs are here to stay," Hoskinson said. "After it collapses they're going to pick up the pieces and say how do we do things differently."
